COT Market Review: COT rate rises 80 bps due to liquidity crunch

KARACHI: Average rate for carryover transactions (COT) at the Karachi stock market increased by 80 basis points due to insufficient liquidity in the market at the end of financial year 2004-05.

“The badla rate was high due to year-end effect,” said Faiza Naz, an analyst at Jahangir Siddiqui and Company. She said badla volumes are declining due to the dual effect of the scheduled badla reduction and lower availability of liquidity. Financers avoid lending in the badla market at this time of the year.

According to a research report prepared by Invest Capital and Securities, the weighted average badla rate at KSE rose to 14.9 percent by the end of the week, 80 basis points higher from the weighted average KSE badla rate on the previous weekend.

Faisal Jiwani, an analyst at Invest Capital and Securities, said badla rate remained on the higher side throughout the last week, owing to year-end concerns of potential badla financiers. The interbank money market remained short of liquidity, with no open market operation forthcoming from the Sate Bank of Pakistan (SBP).

On the other hand badla investment at KSE continued to decline with volumes also declining. It has to be noted that badla phase-out is progressing ahead of schedule.

KSE badla volume dipped to 125 million shares on the last trading day of the ended week compared to volume of 147 million shares on the previous weekend. Badla investment fell to Rs 12.7 billion from Rs 14.9 billion during the week.

Similarly the weighted average badla rate at Lahore Stock Exchange (LSE) rose to 17.0 percent from 10.6 percent on the previous weekend. Badla investment at LSE fell marginally from Rs 1.14 billion to Rs 1.13 billion on a weekend-to-weekend basis.

He said unlike previous week this week leveraging through badla and futures at KSE declined slightly. The KSE-100 index ended fiscal year 2004-05 with a 41.1 percent gain despite the crisis in March 2005.

During the last week of fiscal year 2005, the index managed a gain of 1.6 percent to close the week at 7,465 points level.

The badla and futures markets remained subdued, as badla phase-out continued and the KSE-100 index remained range-bound. Total leveraging at KSE through badla and futures last week fell by Rs 0.4 billion to Rs 21.7 billion. Spreads on both badla and futures, however, remained a bit on the higher side owing to the year-end effect.

The stock futures market saw a gradual increase in open interest during the week. Open interest in the July futures at KSE rose to Rs 9.0 billion last Friday from the previous Friday’s level of Rs 7.2 billion. In terms of number of shares also, open interest rose from a level of 63.5 million shares on the previous weekend to 76.6 million shares on last weekend.

Shifting of leverage from badla to futures was evident, with KSE badla volume falling by 22.1 million shares and futures open interest rising by 13.1 million shares.

The remainder of the leveraged positions could have found avenues such as margin financing, or might have been liquidated.

During fiscal year 2005, several records were broken on the badla and stock futures fronts. The highest ever level of badla investment at KSE was seen on February 18, 2005 at Rs 40.3 billion.

The stock futures market went through a tumultuous year, as it played the dual role of acting as a saviour for leveraged buyers, and then overturned the fortunes of many of those leveraged buyers during the March 2005 crash. staff report

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